A ruling by the Australian Taxation Office serves as a timely reminder for employers to calculate their superannuation guarantee obligations correctly.

A recent ATO ruling about superannuation guarantee obligations will reportedly cost an employer in the resources industry $5m in back payments. The employer engaged people to work on a fly-in fly-out basis at a gas processing plant in remote Western Australia. The employees worked a regular roster of 12 hours per day for 14 consecutive days, after which they had 14 consecutive days off. Consequently, in each 28 day cycle, they worked a total of 168 hours. All hours worked were paid at a single allinclusive rate which took into account all overtime, loadings and allowances.

The employer had been making superannuation contributions only in respect of 38 hours worked in any one week. This meant that each worker received superannuation contributions in respect of only 76 hours in any 28 day cycle, rather than the full 168 hours that they actually worked. In adopting this approach, the employer had believed that they were entitled to disregard all hours worked in excess of 38 in any week. Upon being challenged by the CFMEU about the way that it was calculating the contributions, the employer asked the ATO to consider the matter and make a binding private ruling.

Under the Superannuation Guarantee (Administration) Act 1992, employers’ superannuation obligations are governed by the concept of “ordinary time earnings” (OTE). Section 6 of the Act primarily defines OTE to mean “earnings in respect of ordinary hours of work”. However there is no statutory definition of “ordinary hours of work”.

In considering the matter, the ATO made reference to its own Superannuation Guarantee Ruling SGR 2009/2, which seeks to explain the ATO’s interpretation of the meaning of OTE. That Ruling is available on the ATO’s website.

In addressing the facts of the case, the ATO noted that the hours worked by the employees in excess of 38 per week were not described in their contracts of employment as “overtime”, but were instead described as “the regular hours in excess of an average of 38 ordinary hours per week”. In the ATO’s opinion, this led to the conclusion that those hours were part of the employees’ ordinary hours of work because they were fixed hours and were remunerated at an all-inclusive rate of pay.

Consequently, the ATO ruled that the employer’s interpretation of OTE was wrong and that all of the 168 hours worked by the employees in each 28 day cycle were “ordinary hours of work”.

In our view, the ATO’s determination in this particular case was correct, having regard to the case law on the subject.

However it is necessary to sound a note of caution to employers about the ATO’s Ruling SGR 2009/2. This is because the Ruling arguably adopts an interpretation of OTE that is unduly narrow. It suggests that hours of work that are designated as overtime and paid at overtime rates will never be OTE. This appears to be at odds with the decision of the Federal Court in Quest Personnel Temping Pty Ltd v Federal Commissioner of Taxation in 2002, and the earlier decision of the High Court in Kezich v Leighton Contractors Pty Ltd in 1974.

In Quest, Justice Gray said:

“As is demonstrated by Kezich, there may be cases in which the working of hours beyond fixed standard hours becomes so regular, normal, customary or usual that the additional hours are to be regarded as ordinary hours for a particular employee. This may be so notwithstanding that the additional hours are remunerated at overtime rates or penalty rates.”

We recommend that employers should therefore treat the ATO’s views about overtime as expressed in Ruling SGR 2009/2 with caution.

It should be remembered that ATO rulings do not have the force of law and cannot change the construction of the legislation they purport to explain.

The safe approach is to assume that all “overtime” earnings should be counted as OTE whenever it can be said that it is “regular, normal, customary or usual” for the overtime in question to be worked by a particular employee.